Insuring Yourself against Disability

Disability insurance, also known as disability income (DI) insurance, can be vital. If you are unable to work, this coverage will pay you an income, enabling you to maintain your lifestyle.

Many federal employees purchase such policies out of concern that they will not be deemed eligible for injury or illness benefits under the Federal Employees Compensation Act, Social Security disability or federal disability retirement. However, it’s worth checking the terms of both policies closely to make sure you would not be paying to duplicate coverage you already have, if an active employee. The policy may pay only partial or no benefits if you are also receiving what in the industry is called “legislative disability benefits.” FECA and Social Security and federal retirement disability may fall under that category.

Also, DI is designed to replace income that you would have made through working. Therefore, there generally is no need to buy, or maintain, DI after retirement.

If despite those considerations it appears that you might want to purchase DI, here are the basics you should know about this protection:

Definition. In order to collect benefits, you need to be “disabled,” as defined by the policy. Will you collect benefits if you no longer can perform your specific occupation but can still do some type of work? Find out before you buy.

Amount of benefits. The amount of disability insurance you can buy is pegged to your income. Someone with a $100,000 annual income, for example, can buy more disability insurance than someone with a $50,000 income.

Calculation of benefits. Some policies will pay a certain disability benefit if you can’t work. Often, that’s 60 percent of your pay. If your income is $8,000 per month, for example, your disability benefit might be $4,800 a month. Other disability policies base their payments on loss of income. Suppose you have a policy that would pay you $5,000 a month if you’re totally disabled. However, say you are able to go back to work but your income is cut in half. This type of policy would pay you half of your benefit, or $2,500 a month.

Cost. Naturally, a more generous disability insurance policy will cost you more. That is, the greater the benefit you might receive, the more expensive the policy will be. The same is true of a policy that makes it relatively easier for you to receive disability benefits.

Waiting period. Some policies will start paying benefits as soon as you are disabled. Other policies, though, won’t pay until your disability has lasted 90 days, 180 days, or even a year. The faster you want benefits to begin, the more expensive a policy will be. Therefore, you may be able to cut the cost of this coverage by agreeing to wait for a while before receiving disability benefits.

Payout period. Most disability insurance policies will pay benefits for the rest of the person’s life, or perhaps until age 65. Again, you can cut costs by choosing a shorter payout period. Young people in particular should have this coverage because they might not have had time to build up a retirement fund or qualify for a pension.

As long as you pay the disability insurance premiums with your personal funds, any disability benefits you receive will be tax-free.